Berkshire Hathaway 1999 Annual Meeting

Warren Buffett opens the 1999 annual meeting and conducts formal business, including director elections. He explains why Ron Ferguson of General Re chose not to join the Berkshire board, discussing the restrictions and costs that come with board membership, including trading limitations and compensation disclosure requirements.

Discussion of Berkshire's attempted bid to acquire LTCM during the 1998 financial crisis. Buffett clarifies that their bid did not 'unravel' - LTCM rejected their firm offer for over $100 billion in assets and a trillion in derivative contracts. Charlie warns about systemic risks in the derivatives market.

Buffett discusses his Wharton comment about compounding small sums at 50% annually. He explains how with $1 million, investors can find tiny inefficiencies and arbitrage opportunities that disappear rapidly as capital grows. The advantage of small capital diminishes dramatically from $1M to $10M to $100M.

Discussion of corporate America's refusal to expense stock options and other questionable accounting practices. Buffett praises SEC Chairman Arthur Levitt's efforts to improve corporate accounting standards but notes widespread resistance to recording option costs in income statements.

Buffett reflects on closing his investment partnership in 1969 due to inability to find investments meeting his standards. He draws parallels to 1999 market conditions but cautions against predicting a repeat of the 1973-74 crash. Charlie notes similarities but emphasizes they can't predict exact timing.

When asked about investing in communications stocks like AT&T and Nokia, Buffett points out AT&T's poor 15-year return on equity despite repeated special charges. He acknowledges amazing developments in communications but notes these businesses fall outside Berkshire's circle of competence for predicting long-term winners.

Discussion of Chinese companies trading at 5x earnings with 20% growth rates. Buffett acknowledges if such opportunities exist with high returns on equity and ability to reinvest capital, investors could make substantial money. However, he and Charlie admit limited knowledge of Chinese markets and suggest investors with local expertise have advantages.

Buffett explains Berkshire's long-standing preference for acquiring entire businesses through negotiation, though historically they found better values buying pieces of wonderful businesses in the stock market. He notes you can never make the same bargain purchases in negotiated deals that are possible in weak stock markets.

Detailed discussion of why Berkshire isn't in the S&P 500 and the market disruption that would occur from index funds needing to buy 6-7% of the company. Buffett proposes two solutions: simultaneous stock issuance (which Berkshire won't do) or 12-month phase-in of index weighting (used successfully in Australia).

Buffett explains that General Re's float declined slightly in Q1 1999 and won't grow rapidly in the near term. At $6 billion in premiums, paid losses will keep float steady. He expects long-term float growth, especially internationally, enhanced by Berkshire's capital strength and reputation.

Buffett argues Berkshire's greatest social contribution is delivering goods and services efficiently at lower cost, citing GEICO saving consumers over $600 million annually. He opposes CEOs directing corporate philanthropy, preferring the shareholder designation program where owners make their own charitable decisions.

Extended discussion on insurance float as Berkshire's core strategy. Buffett admits he couldn't have predicted the growth rate 30 years ago but emphasizes growing cheap float remains a primary goal. Charlie delivers memorable quote about astronomical growth rates requiring divine intervention.

Explanation of the arbitrage relationship between Berkshire's Class A and Class B shares. Buffett describes how buying patterns affect the premium/discount relationship, with Class B sometimes trading at a discount when institutional buyers prefer Class A, and at a premium when retail buyers are more aggressive.

Buffett recommends Katherine Graham's autobiography as an incredibly honest and fascinating account of her life in politics, business, and government. He also strongly endorses Jack Bogle's 'Common Sense on Mutual Funds,' praising Bogle as an honest person who knows the investment business.

When asked about investing in a Kleiner Perkins-managed internet fund, Buffett acknowledges the internet may be the most important commercial development in 500 years. However, he explains that understanding the promotion process doesn't mean they can pick long-term business winners. He distinguishes between making money from early-stage flipping versus building sustainable businesses.